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An annuity is a contract issued by an insurance company that allows you to contribute funds, earn a guaranteed minimum interest rate, grow tax-deferred while in the accumulation phase, and provide you with a guaranteed income for a period of time or for the rest of your life.
Can you name any other investment instrument or bank account that offers you this level of flexibility, guaranteed benefits, tax-deferral and lifetime income?
There are two types of annuities, fixed and variable. A fixed annuity provides you with a guaranteed of principal and interest. Your principal earns a current level on interest that can not fall below the specified guaranteed minimum in your annuity contract. A variable annuity provides you the opportunity to invest in separate contract accounts that are run similar to mutual funds and offer you the opportunity to have professional money management with tax-deferral. Fixed annuities are not subject to any market risk while variable annuities are subject to market risks.
When you purchase an annuity, you are giving the insurance company a sum of money and in return you receive an annuity policy, The annuity policy is considered to be either a deferred annuity or an immediate annuity. A deferred annuity provides you with the opportunity to let premium accumulate interest tax-deferred and grow. An immediate annuity provides you with a specified, guaranteed income stream immediately (the payments usually begin within 30 days of purchase.)
There are some forms of annuities that do not pay interest but credit your earnings based on index performance (indexed annuities) or have a value based on sub-account refunds (variable).
How does an annuity compare?
|
Declared Rate Fixed Annuity |
Equity Indexed Fixed Annuity |
Variable Annuity |
Equity Indexed Mutual Fund |
Stock |
Bond |
| Tax Deferral |
Yes |
Yes |
Yes |
No |
No |
No |
| Death Benefit |
Yes |
Yes |
Yes |
No |
No |
No |
| Guarantee of Principal |
Yes |
Yes |
No |
No |
No |
No |
| Lifetime Income |
Yes |
Yes |
Yes |
No |
No |
No |
| Minimum Interest Guarantee |
No |
Yes |
Yes |
Yes |
Yes |
Yes |
| FDIC Insured |
No |
No |
No |
No |
No |
No |
| Surrender Charge |
Yes |
Yes |
Yes |
Maybe |
No |
No |
| Management Fee |
No |
No |
Yes |
Yes |
No |
No |
| Dividends |
No |
No |
Yes |
Yes |
Yes |
No |
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